IT questions get a Logica answer

The Computer has become a ubiquitous device in commerce and government worldwide. This explains why companies that offer services to help companies and organisations use computers are busy and appear likely to stay that way.

Almost any major development has information technology implications which means even more work for the experts. For instance, the need to fix programs that use a two-digit "year" field so they will read a date ten years hence as 2006, not 1906; or adapting systems for the arrival of the Euro, which will affect the UK even if we are not members of the single currency.

IT companies are also benefiting from the global trend of outsourcing. In the early days of the computer revolution, most big companies had their own in-house computer departments. However, since the 1980s these in-house operations have increasingly been reduced and replaced by partnerships with third-party suppliers of services.

An exciting theory is that the UK IT service providers are at the same stage as the United States industry a few years ago when demand took off, creating the giants of today. Against that background Logica, at 849p, with a turnover in the year to 30 June 1996 of pounds 285m, is still a relative tiddler. But it could provide attractive prey for a US giant hungrily eyeing the growth opportunities in Europe and the rest of the world.

Current rosy prospects for the industry stand in stark contrast to the position earlier in the 1990s when companies such as Logica were so small that one or two big contracts going wrong or running over budget could create severe difficulties.

Logica's profits and share price fell heavily in the early 1990s at a time of great hardship for the whole industry. This led to the appointment in 1993 of a new chief executive, Martin Read, who was previously the boss of GEC Marconi Radar and Control Systems, an organisation with pounds 500m sales and 6,500 employees against around 3,800 currently at Logica, of whom 85 per cent are graduates.

The changes made by Read at Logica amount to a huge cultural shift from a boffin-driven to a profits-driven organisation. Logica provides customised solutions for its clients but tries to incorporate as much as possible of past work in new contracts. This has driven a sharp increase in profit margins over the past five years, although they are still not up to the heady levels achieved in 1989.

The problem for investors is that Logica shares are not cheap. They have climbed by 56 per cent since I recommended them in March and the prospective PE, on analysts' forecasts, is nearly 27. Against that, though, the sustainable growth rate for the group is close to 20 per cent, suggesting it is still not too late to climb aboard.

The shares offer an excellent route into what is going to be one of the 21st century's most important industries.

Delphi Group, at 635p, has changed its name and its top management. It used to be known as Computer People however, after strong growth in the 1980s, lost its way in the early 1990s.

A new management team took control, led by Tony Reeves, who was appointed chief executive in April 1994. He made two acquisitions in 1994 which brought in a new managing director, Doug Woodward, to run Computer People and made the group the UK market leader in the supply of contract IT personnel on assignment to large companies like British Airways and IBM. Profits have grown from pounds 1.1m for 1993 to pounds 9m for 1995 with further advances to pounds 12.1m and pounds 15.3m forecast for 1996 and 1997.

Another key element in Reeves' strategy is to build on the group's strength in its core market by expansion into related services such as training and permanent recruitment, and to replicate the business in overseas markets.

The acquisition of Alpine, a fast growing US network technology consultancy, takes total US turnover towards $100m. Delphi looks good value on a PE dropping to around 17 on next year's forecast.